Futuris Corporation Limited (ACN 004 336 636) v Commissioner of Taxation

INTRODUCTION 1 This matter relates to a challenge by the applicant of an assessment by the respondent under Part IVA of the Income Tax Assessment Act 1936 (Cth) (the ITAA 1936) that the applicant obtained a tax benefit of $82,950,090 in connection with a scheme to reduce income tax liability. The matter is listed for hearing, commencing on 13 July 2009. 2 The applicant by notice of motion of 5 May 2009 now seeks further and better particulars of: 1.1 the events and transactions which the Respondent alleges would have occurred had the 'scheme' pleaded in paragraph 46 of the Respondent's Response to the Applicant's Statement of Grounds not been entered into; and 1.2 the essential terms on which it is alleged that those events and transactions would have been implemented, or such other particulars as the Court considers appropriate in the circumstances.

BACKGROUND 3 The history of this matter, and another related matter, are described in the judgment of Finn J in Futuris Corporation Limited (ACN 004 336 636) v Commissioner of Taxation [2006] FCA 1096 relevantly at [2]-[10]. I respectfully adopt his Honour's description. I do not need to refer to those background facts further. For present purposes, it is sufficient to set out the pleadings and subsequent correspondence giving rise to the present application for particulars. 4 On 15 December 2006, the applicant filed its Statement of Grounds. At paragraph 39 of the Statement of Grounds, the applicant set out the background to the applicant's tax return for the year of income ended 30 June 1998: 39 On or about the 7 December 1998 Futuris, being a relevant entity within the meaning of Division 1B of Part VI of the ITAA 1936, furnished a return in respect of the year of income ended 30 June 1998 ("the 1998 Return"). Futuris specified in the 1998 Return: 39.1 that it had a taxable income of: $86,088,045.00 39.2 that tax payable on that taxable income was: $30,991,696.20 5 On 23 March 2007, the respondent filed its "Response to the Applicant's Statement of Grounds" (the Response). At paragraph 32 of the Response, the respondent pleaded: 32 The Commissioner admits the allegations in paragraph 39 of the Applicant's Statement and says further that:- (a) the taxable income of $86,088,045 ("the declared amount") understated the taxable income for the 1998 year by $82,950,090 ("the understated amount") and the amount of $30,991,696.20 is the gross tax on the declared amount; (b) the understated amount was described in the 1998 return as "Division 19A Value Shift". 6 At paragraphs 44 to 46 of the Response, the respondent pleaded: 44 Further, and in answer to the [Statement of Grounds], the Commissioner says that the understated amount of $82,950,090 referred to in paragraph 32 herein is the tax benefit which Futuris obtained, or would have obtained, but for the operation of Part IVA in connection with a scheme to which Part IVA applies. 45 The amount of the tax benefit would have been included, or might reasonably be expected to have been included, in the assessable income of Futuris in the 1998 year. Particulars (a) Futuris (before entering into or carrying out the scheme) had decided to dispose of the building products division of the Futuris group of companies through directly or indirectly wholly owned subsidiaries; in particular Bristile, Bristile Operations, Vockbay and Walshville. (b) The disposal of the building products division produced a capital gain for the purposes of the ITAA 1936. (c) Futuris increased the indexed cost base of its shareholding in Walshville under section 160ZZRH in Division 19A by entering into or carrying out the scheme and thereby reduced the capital gain upon the disposal. Scheme 46 The tax benefit was obtained in connection with a scheme to which Part IVA applies. A. On or about 2 September 1997: (a) Bristile sold most of the net assets of the building products division to Bristile Operations for $210,000,000 and recorded an accounting profit of $146,000,000; (b) A dividend was declared by Bristile to Vockbay of $146,000,000 and was satisfied by the issue of Vockbay of 94,193,548 fully paid $0.50 shares at a premium of $1.05 per share; (c) A divided was declared by Vockbay to Futuris of $63,000,000 that was satisfied by the issue to Futuris of 630,000 fully paid $1 shares at a premium of $99 per share. B. Alternatively, on or about 2 September 1997: (a) Bristile sold most of the net assets of the building products division to Bristile Operations for $210,000,000 and recorded an accounting profit of $146,000,000; (b) A dividend was declared by Bristile to Vockbay of $146,000,000 and was satisfied by the issue of Vockbay of 94,193,548 fully paid $0.50 shares at a premium of $1.05 per share; (c) A divided was declared by Vockbay to Futuris of $63,000,000 that was satisfied by the issue to Futuris of 630,000 fully paid $1 shares at a premium of $99 per share. (d) Vockbay sold its shares in Bristile to Walshville at the price of $97,313,000 being the book value of the net assets of Bristile. 7 By letter dated 4 May 2007, the applicant requested further particulars, inter alia, in relation to paragraphs 44 and 45 of the Response: 4.1 in so far as the Commissioner alleges that the amount of $82,950,090 was a tax benefit (within the meaning of s 177C(1)(a)) obtained by Futuris in connection with a scheme, then:- 4.1.1 what are the facts, matters and circumstances relied upon by the Commissioner in alleging that the amount of $82,950,090 would have been included, or might reasonably be expected to have been included, in the assessable income of Futuris if the scheme had not been entered into or carried out; 4.1.2 what are alleged to be the events or transactions which would have occurred and as a consequence of which the amount of $82,950,090 would have been included, or might reasonably be expected to have been included, in the assessable income of Futuris if the scheme had not been entered into or carried out. 8 On 15 June 2007 the respondent filed a document, "Respondent's Response to the Applicant's Request for Particulars Dated 4 May 2007". In relation to the request for particulars of paragraphs 44 and 45 of the Response, at paragraph 4 the respondent submitted: This is a matter for evidence and submissions not particulars. 9 Almost two years later, on 26 March 2009, the applicant reiterated its request for particulars by letter to the respondent, setting out some general propositions about the function and purpose of particulars, and then stating: 5. It is plainly in the interests of the proper conduct of the litigation that the Commissioner identify that which he alleges would have occurred had the scheme not been entered into. It would be an inappropriate way of conducting this litigation not to disclose the Commissioner's contentions in this regard until closing submissions. That would not be consistent with the Commissioner's obligation to act as a model litigant. Such an approach would require Futuris to seek to prepare for each and every possible counterfactual or 'alternative postulate' the Commissioner might be able to put, when the counterfactual he intends to put is one which he can readily identify. That would involve unnecessary expense and delay. 6. We ask the Commissioner provide the following particulars: 6.1 what are alleged to be the events or transactions which would have occurred had the schemes pleaded in paragraph 46 of the Response not been entered into? 6.2 what are alleged to be the essential terms of those alleged transactions? In that letter, the applicant foreshadowed instructions to file a notice of motion seeking particulars if none were forthcoming. The applicant reiterated that request by letter on 6 April 2009. 10 By letter dated 8 April 2009, the respondent replied: 3. Our client does not agree with your position and contends that as your client has the onus of proving the assessment is excessive, it is for your client to put before the Court any evidence it wishes as to what would have occurred if the whole of the scheme identified by the Commissioner had not been entered into. It is for the Commissioner to respond to the objective evidence not speculate and opine in advance as to what Futuris would have done but for the scheme. 11 The respondent referred to the applicant's Statement of Grounds in which the applicant claimed there is no amount which has not been included in the assessable income of Futuris for the year of income ended 30 June 1998 which amount would have been included or might reasonably be expected to have been included in the assessable income of Futuris of that year of income if the scheme had not been entered into or carried out, and referred to the onus of proof in s 14ZZO of the Taxation Administration Act 1953 (Cth) requiring the applicant to support that allegation with evidence. 12 The respondent further noted: 7. Consequently, the Commissioner will respond to the objective evidence before the Court. The Commissioner will make submissions to the Court as to the tax benefit obtained in connection with the scheme taking into account any "alternative postulate" (or counter factual) indicated by this evidence. The Commissioner will not provide an opinion or particulars speculating as to what events or transactions companies in the Futuris group would have engaged in lieu of the scheme. It would be embarrassing for the Commissioner to be required to provide such particulars when the existence of a tax benefit obtained in connection with a scheme does not turn on his opinion and he is not a party to any of the transactions and other conduct of Futuris relevant to the Part IVA inquiry before the Court. 8. Our client is of the view that he has clearly stated for Futuris (and the Court upon hearing the taxation appeal), the basis upon which he concluded there was a tax benefit obtained in connection with a scheme and made the amended assessment giving effect to this Part IVA determination. The respondent referred the applicant to materials, including the Reasons for Decision and paragraphs 44 to 48 of the Response, and continued: 9. Based on documentation made available to the Commissioner by Futuris during the taxation audit, the Commissioner based his assessment on the following alternative postulate:- 9.1 A decision had been made by the Futuris group to sell its building products division comprising a number of subsidiaries wholly owned by Futuris. This decision had been made before the scheme was entered into or carried out; 9.2 The market value of the shares in the building products division subsidiaries was unchanged by the scheme transactions, and the sale of the building products division without the scheme transactions would have also generated a gain of $150m to Futuris; 9.3 This $150m gain would have been reduced by the cost base of the shares held by Futuris in its wholly owned building products division subsidiaries. Without the scheme transactions this cost base was not inflated by $82,950,090; and 9.4 As a result an assessable gain of $92,739,340 and not $9,789,250 would have been included or might reasonably be expected to have been included in the assessable income of Futuris for the income year ended 30 June 1998 from the sale of its building products division. 10. This contention is based on the Commissioner's understanding of the documents before him at the time he made his Part IVA determination and assessment. The Commissioner considers that his understanding at that time does not limit any contentions he will put to the Court on an "alternative postulate" apparent from the facts established by evidence at the hearing. On 5 May 2009, the applicant filed the present notice of motion seeking the particulars set out in [2] above.